Let us start this post by saying, if you already know how to negotiate a lease you are ahead of the game! Most of the time, when tenants are planning to enter into a lease agreement with their landlord they don’t know what should be “included”. Reason being… no two leases are the same! When reviewing leasing documents, make sure you thoroughly review and fully understand every aspect of the terms. Don’t be afraid to admit you don’t know what you don’t know!
We suggest working with a leasing agent to make sure you are getting the most value out of your lease and that you are entering the best possible scenario for the new home of your business! On the same note, it is important to find a leasing agent you trust. They will be your “battle buddie” and should fight for you to get the best of the best in your lease agreement. Keep in mind, negotiating a lease for a new space (empty box) vs an existing space (remodel) is very different. For this post we will focus mainly on negotiating a lease for a new space that is being built from an empty shelf (or vanilla box as we call it).
With that in mind… we met with Dick Reed, owner of the successful SR Construction, to discuss what he has seen in the recent market regarding lease negotiations. We hope this post helps you understand where to start with lease negotiations.
Furring: Typically a term for materials used in the construction of walls. Furring can be done with wood, steel or other stud construction material. Furring is used to make space for insulation, or to level and resurface ceilings or walls.
Demising Wall(s): Are walls that separate a tenant’s suite from another tenant’s suite, or separate common areas in a building. Demising walls are typically found in retail strip center malls and commercial buildings with multiple tenants.
HVAC: Short for heating, ventilation, and air conditioning. The system is used to provide heating and cooling services to buildings. HVAC refers to anything from the heating/cooling unit, ducting, controls and the electrical hookup of those services.
Here is an example of a BEST-CASE scenario lease agreement. In additional to including all the items below, the landlord gave these tenants additional funds to put towards their space improvement.
What was included in the lease:
- All HVAC equipment (including electrical hookup) with distribution lines (ducting)
- 200 amps of power to the space (wired into a panel)
- All interior and exterior walls furred and insulated
- All demising walls completed up to the roof
- Finished drop ceiling
- Fire sprinklers (above and below the drop ceiling). Most landlords will provide the sprinklers for above the drop ceiling but not below.
- Estimated cost to put in sprinklers below a drop ceiling in a 2,000 square foot space is about $13,500 [roughly 15 sprinklers are needed at $900/each].
- All Plumbing (including water heaters)
- For spaces that are part of a larger building, you may have “house” water systems already.
Here is an example of what we call a “BARE BONES” lease agreement scenario. In this scenario, the tenant got a roof, bare walls, and a front door with a $40,000 tenant allowance.
What was included in the lease:
- Empty conduit. The tenant was responsible for putting in a power box and wires, which typically costs around $10,000.
- Drywall and furring on the demising walls (interior and exterior) were not included.
- All the walls had to be insulated at the tenant’s expense, roughly $16,000.
- No HVAC equipment. The tenant had to purchase and install- at their own expense, about $15,000.
- Water line was available, however the tenant had to purchase a hot water heater as well as the hook ups which cost around $1,300.
As you can see these different lease scenarios are vastly different! This is why it is important to educate yourself on what goes into a lease negotiation, work with a leasing agent, understand your wants and needs, and make sure you know exactly what you are willing to take on before signing a lease.
Items not discussed in the lease scenarios above but are important things to note.
- Typically, landlords do not include bathrooms in a new space build out, however you are required to have at lease 1 (and most of the time 2) bathrooms in a space.
- You can confirm the number needed with the building department in your city, but in our experience most spaces over 1,500 square feet require at least 2, but this varies by how your business is categorized by the building department.
- Adding in an ADA bathroom typically runs about $5,000.
- Requesting time. Most of the time you can negotiate with the landlord to give you a few months of free rent. This extra time allows you to get into the space and make any changes you need, or in the case of a new space build out all the walls and install your fixtures and casework.
- Every landlord is different, so use “free time” as a bargaining chip!
- Tenant improvement funds. Some landlords will give their new tenants money that they can put towards improvements to the space. This is a great addition to a lease that you can negotiate and it allows you to discuss your vision for the space with the landlord.
For a remodel of an existing space, many of the key concepts are the same for items you will want included (HVAC, Plumbing, Etc…). You may not have to “fight” as hard to get them all included, since they will most likely be there already. However, you will want to do a full inspection and if any repairs are needed, try to work those into your lease negotiation. Make sure in your lease that it is very clear who (you vs the landlord) is responsible when systems fail or need an upgrade (i.e. water heater, air conditioner, etc…).